Chapter 38
Secured Transactions and Suretyship
Objectives:
1. Name and define various sources of collateral.
2. Attachment and perfection.
3. Priorities of claims on collateral.
4. Formation of suretyship.
5. Explain rights of creditor against surety
I. Essentials of Secured Transactions
A. Definitions
1. Security interest
2. Collateral
3. Secured party
4. Debtor
5. Obligor
6. Secondary obligor
7. Purchase money security interest (PMSI)
B. Classification of Collateral
1. Goods
a. Consumer goods
b. Farm products
c. Inventory
d. Equipment
e. Fixtures
f. Accession
2. Indispensable paper
a. Chattel paper
b. Instruments
c. Documents
d. Investment property
3. Intangibles
a. Accounts
b. General intangibles
4. Other
a. Proceeds from transaction
b. Timber, mineral rights, etc.
II. Attachment
A. Elements of Attachment
1. Secured party has given value
2. Debtor's rights in collateral
3. Security agreement
a. Authenticating record (written or electronic)
b. Pledge (no writing in some cases where creditor takes possession)
New West Fruit Corp. v. Coastal Berry Corp., p. 777.
Facts:
1984. New West/Monc loaned money and plants to
1984.
New West/Monc enter "Sales and Marketing
Agreement" with
Agreement granted New West/Monc security interest in all crops for 1984/5 season, but made no mention of the plants or money advanced.
Financing statement was signed and filed.
Jan 1985. Monc shuts down, assigns all assets to New West.
April
1985. New West learns
New West demands Coastal Berry pay amounts owed, or allow New West to market and recover funds.
Coastal
Issue: Did the "Sales and Marketing Agreement" sufficiently identify the debt being secured?
Holding: Yes. Agreement showed that the parties' intent was to create a security interest.
c. Consumer goods (federal law prohibits non possessory security interest in household goods sold to consumer)
d. After acquired property (lien generally allowed)
e. Future advances (ex. Line of credit)
III. Perfection
A. Making security interest good against third parties
B. Methods of perfection
1. File financing statement (see p. 781) (either written form or electronically)
a. Duration of filing (five years)
b. Place of filing (usually secretary of state)
c. Subsequent change of debtor's location
2. Possession
a. Pawnbroker
b. Pledge (delivery to creditor or creditor's agent)
c. Field warehouse (kind of pledge, with a professional warehouseman)
3. Automatic perfection (PMSI)
Kimbrell's of
Facts: Burns buys a VCR from Kimbrell's on credit.
Burns signed PMSI agreement at time of purchase.
No financing statement filed.
Burns pawned the VCR to KPS.
Burns defaulted. Kimbrell's made claim on VCR, now at KPS.
Issue: Is the PMSI valid against KPS, even though no one filed a financing statement?
Holding: Yes. In consumer goods, perfection is automatic on attachment. No filing necessary.
4. Temporary perfection (in certain financial instruments, 20 day grace period to file statement)
5. Perfection by control (ex. Bank's security interest in bank account)
IV. Priorities Among Competing Security Interests
A. Security interest beats unsecured creditors
B. Among other secured creditors
1. Perfected wins over unperfected
2. Perfected v. perfected (first filer usually wins)
3. Exceptions
C. Unperfected v. unperfected (first to attach wins)
D. Against buyers
1. Generally, perfected security interest goes with the goods
2. Buyer in ordinary course of business takes free of security interest (true of farm products as well)
3. Buyers of consumer goods (takes free of automatic perfection, but not filed perfection)
4. Buyers of other collateral
E. Against lien creditors (e.g. judgment creditors)
1. Perfected interest wins
2. Unperfected interest loses, generally
F. Against trustee in bankruptcy
1. Trustee may invalidate any security interest that is voidable by a creditor who obtained a judicial lien on the date the bankruptcy is filed
2. Avoidance of preferences (90 day rule)
V. Default
A. Repossession (self help strategies)
Chrysler v. Koontz
Facts: D buys car from Chrysler on credit. He defaults on payments. He writes letter forbidding Chrysler from coming on his property. Repo guy comes, D tells him "Don't take it!" Repo guy ignores him and drives away with car. Koontz challenges deficiency collection proceeding on grounds that Chrysler "breached the peace."
Issue: Did Chrysler breach the peace within the meaning of the statute?
Holding: No. So long as no breaking and entering or use of violence, then no breach of the peace and creditor is within rights.
B. Sale of collateral (must be reasonable)
C. Acceptance of collateral (usually when creditor is in possession)
VI. Suretyship
A. Nature and formation
1. See chart, p. 793
2. Principal debtor, creditor, and surety (guaranties principal's obligations)
B. Types of sureties
1. Guarantor of loan
2. Assumption of mortgage (original borrower becomes surety)
3. Surety bonds (fidelity, performance, official, judicial)
C. Formation
1. Statute of frauds requires a writing
2. Consideration required
D. Rights of surety
1. Exoneration (right to force principal to perform)
2. Reimbursement (right to money back from the principal, aka indemnity)
3. Subrogation (steps into the shoes of the person paid)
4. Contribution (rights among cosureties)
E. Defenses of surety and principal debtor
1. Personal defenses of principal debtor (available only to the principal)
2. Personal defenses of surety (available only to the surety)
American Manufacturing v. Tison, p. 796.
Facts: Paulk was in the livestock business.
He purchased performance bonds from AMMIC.
He executed indemnity agreement in favor of AMMIC, with his name and Betty and Ashley on the indemnity agreement.
There was a claim on bond. It turns out the indemnity agreement was forged.
AMMIC denied claim on grounds of fraud.
Issue: Can AMMIC avoid obligations on bond to third party creditor when principal committed fraud?
Holding: No. Under surety law, as opposed to insurance law, surety is still obligated to innocent third party creditor.
3. Defenses of both surety and principal debtor (misconduct of creditor)